Solvency II may drive captives to move to Asia

Companies with captives based in Europe are likely to consider redomiciling them to Asia, due to the higher capital charges they will incur under Solvency II, according to a report from Marsh, Asia Insurance Market Report 2016.

The captives affected by Solvency II, which generally only write the risk of their associated group and subsidiaries, may relocate to obtain a more appropriate regulatory structure for the risks they assume.

Marsh suggested this move would be a particularly attractive option for “reinsurance” captives that already have fronting arrangements in place for writing European-based risk.

Singapore, which is considered the hub for Asian captives, has experienced growth with the number of captives increasing by 6 percent from 64 in 2014 to 68 in 2015.

The report stated that most of the growth in this market has come from captives owners outside Asia, for example in Mexico or Australia.

However, Marsh suggested that captives have also been affected by the highly competitive global insurance market and current pricing environment, with organisations potentially finding it hard to justify using a captive internally when rates externally are so cheap.

In spite of this, Marsh has seen a developing trend of organisations seeking to minimise their external spend taking more business into their captives, notwithstanding that the payback periods are longer.

According to Marsh, another challenge captives face is that many Asian countries are seeing some form of economic slowdown, which can have implications for companies considering forming captives.

“With businesses less able to suffer the volatility of losses, combined with a ‘cheap’ insurance market, there are considerably less-compelling arguments for assuming additional risk within your insurance programme,” said Stuart Herbert, captives leader for Asia at Marsh.

“Of course, it does also present some opportunities for captives in that it can also focus organisation on the level of external spend for their insurance and they may take a more critical view of the spend and whether they can place more risk into their own captives.”